How To Cash In On The Outperforming European Financial Sector

The European financial sector, as represented by the iShares MSCI Europe Financials ETF (EUFN), has underperformed the primarily US based Financial Select Sector SPDR Fund (XLF) by nearly 22% over the last three years. This year, however, European financial shares have outperformed their US counterpart by 3.5%. The chart of the EUFN is one to watch for an opportunity to catch the next leg-up in the financial space.

The weekly EUFN chart shows the fund spending all of 2016 forming an inverse head and shoulders pattern, below neckline resistance in the $17.75 area. It made a decisive breakout from that base at the end of 2016, and followed up this year by making a steady series of higher highs and higher lows with improving money flow.

In July, the fund broke above $22.32, which had been the previous all-time high made in 2015. It moved up to the $23.50 level and began trading in a narrow horizontal channel below that resistance level and above the 2015 high resistance-turned-support level.

Money flow has backed off but is still strongly positive and moving average convergence/divergence is still tracking above its centerline.

The chart suggests two potential entry points. First, would be after a pullback to the channel support line which is intersecting with the 40 week moving average. This entry level would allow for a close initial stop loss, just below the average. Another entry point would be after an upper candle closing break above channel resistance, using a trailing percentage stop.